What is Goodwill and how is it used in business valuations?

Goodwill relates to the intangible assets that buyers obtain in an acquisition – such as the company’s brand, skills, established client relationships, etc.

The perceived value of goodwill can make a massive difference to what a buyer is prepared to offer, but why does it seem so difficult to quantify?

The problem is that, being an intangible asset, any value will be subjective, being a matter of informed opinion.

There is, however, one vital characteristic that has to be present before any value can be attributed to goodwill, in the context of a business sale. It has to be transferable so that it will have a positive impact on the future earnings of the business post acquisition.

If elements of the commercial goodwill are held by the departing owner (usually relationships with key clients, sales or product development) then the goodwill is not held within the business. As such it is not transferable unless the owner remains in the business post acquisition.

Result – the owner has to accept a lower price or has to stay on in the business, often tied in through an “earn out” clause in the sale agreement and usually tied to profit targets.

In order to maximise the value of goodwill it’s essential to provide some evidence. With so much affordable technology available it is perfectly possible to get that data. If you attribute goodwill to your company’s brand, make sure you analyse website and social media statistics to evidence its value. Use data from your CRM system to evidence high sales performance and low customer attrition rates. Document key processes and procedures and audit them, even if you don’t use (or want to use) an accredited system, to evidence quality.

Goodwill is a valuable asset so it’s worth time and effort to maximise its value.

If you would like to find out how much your business is worth we offer a free online valuation service at www.evolutioncbs.co.uk/free-valuation.

 

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